China's middle class isn't what we thought it was

REUTERS/Kim Kyung-Hoon
For years, multinational companies have been rubbing their hands together in anticipation of the growth of the Chinese middle class.

Lately, though, that growth has hit a snag as the Chinese economy slows and struggles to segue into a consumer-based model.

A new report from The Demand Institute — a collaboration between Nielsen and the Conference Board — examined the growth of the Chinese middle class by considering how much purchasing power they really have and how much access they have to the products companies want to sell.

The report depicts a far more complicated picture than the one China bulls want to paint.

"During the years of booming economic growth, it seemed as if consumer businesses in China could not get much wrong," the report said. "But the situation has changed permanently.

"Today, a far higher degree of strategic precision is needed. Overall, we believe the opportunities for geographic expansion are shallower than some business leaders might think."

It's all relative

China is a country with incredible geographic and socioeconomic diversity, so it's hard to nail down exactly what the middle class is and how it will grow.

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The World Bank describes middle class as having the ability to spend between $10 and $50 daily — a significant range, as The Demand Institute points out.

What's more, the World Bank's criteria doesn't consider something very important in China — access. For a middle-class person to consume, they must have access to consumer culture and engage in it. Ecommerce is huge in China but still only generates 10% of retail sales — leaving lots of pent-up demand.

The Demand Institute
According to the report, growing internet penetration will account for 95% of the growth in China's consumer base.

As it stands now, internet penetration is 48% in the country, meaning "there are hundreds of millions of 'middle class' consumers whom MNCs [multinational corporations] will struggle to serve because they don't have online access."

That means the optimal target group for a multinational company is the "connected spender" — a consumer with both purchasing power and access. They made up just 27% of China's population in 2014, and 44% of total consumer spending, or $1.6 trillion.

These consumers are typically under 49, better educated than average, and live in an urban area with internet access.

But their buying power doesn't compare with that of their US counterparts. Between 2010 and 2014, only 12% of these people reported a household income of more than $3,200 a year, or $8.50 a day.

Their spending power is expected to rise from 44% of consumer spending to 60% by 2025, with the growth being largely driven by greater internet penetration. That's a significant increase, but it's not earth-shattering.

The report forecasts that China per capita consumption will be $4,400 by 2025, compared with $32,000 in the US today.

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"While this growth is undeniably spectacular, it is coming from a relatively small per capita base and will arguably remain modest compared with most mature markets even by 2025," the report stated.